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Patent Assertion and US Innovation

On June 4, 2013, President Obama announced a set of 12 initiatives – 7 proposed legislative actions and 5 executive orders – intended to address perceived problems from Patent Assertion Entities (PAEs). The announcement quoted aspersions Obama had cast at PAEs earlier in the year: PAEs “don’t actually produce anything themselves;” instead their purpose is “to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.”

Obama’s action plan was heavily influenced by a report, “Patent Assertion and U.S. Innovation,” which was released by the President’s Council of Economic Advisers, the National Economic Council, and the Office of Science & Technology Policy. The full text of the report can be readhere.

It is surprising that a report that was prepared by such an august and high-level set of entities could be so blatantly biased and one-sided. The body of the report slams PAEs and points to everything that’s bad about them. It creates an artificial distinction by referring to “good” patent middlemen as “patent intermediaries,” although there is no indication in the report of what are the characteristics of a good “patent intermediary” versus an evil PAE.

What’s even more surprising is that after an unbalanced and biased tirade against PAEs, the report’s bottom line recommendations are actually reasonable. Which makes it appear that there was clever political maneuvering going on here: letting the White House jump on the “patent troll bashing bandwagon” without actually proposing things that would be harmful to the US economy and America’s position as the world’s innovation leader.

This post will criticize some of the dumb and biased things in the report, and will conclude with a comment on the conclusions.

Sample of Dumb Stuff in the Report

One of the biggest flaws in the report is that it lumps all PAEs together – both scam artists and legitimate players. The report claims

…they [PAEs] focus on aggressive litigation, using such tactics as: threatening to sue thousands of companies at once, without specific evidence of infringement against any of them; creating shell companies that make it difficult for defendants to know who is suing them; and asserting that their patents cover inventions not imagined at the time they were granted.

There are some companies that send thousands of letters without really knowing who does and who doesn’t infringe a patent. Those are the scam artists. Legitimate businesses – companies such IPNav, or Intellectual Ventures – do not engage in such behavior.

Similarly, not everyone in the business is opposed to transparency. IPNav has expressed support for the End Anonymous Patents Act because we believe it’s important for people to be able to find patent owners.

And as for the claim that PAEs assert that their patents cover inventions not imagined at the time of the patent, that is true – but it’s not unique to PAEs, operating companies do this as well, and this is not a bad thing. It’s a fundamental feature of how patents work. An inventor can patent a fundamental piece of technology that others can build on and take in previously unanticipated directions – but that does not mean that the inventor is not entitled to compensation for the underlying concept which made the new, previously “not imagined” invention possible. For example, Google is asserting US patent 5,581,703, “Method and apparatus for reserving system resources to assure quality of service,” against BT’s service offerings providing phone calls over the internet. The patent was filed in 1993 – when no one was yet thinking about making phone calls over the internet, bandwidth was far too precious. The courts have not yet ruled on the case – but in any event it’s not a PAE making the assertion.

Another example of the error of lumping all PAEs together is that the report assumes that all PAEs use the same business model:

The PAE business model is based on the presumption that in many cases, targeted firms will settle out of court rather than take the risky, time-consuming course of allowing a court to decide if infringement has occurred.

There are PAEs that send threatening letters (as above, to thousands of companies), offering to settle for “nuisance value.” There are also PAEs that use the “big fish” model – enforcing strong patents with clear infringement, against companies with deep pockets. When an infringing company is confronted with clear evidence that a patent is valid and would likely be upheld in court, and that their product offering does indeed infringe the patent, many companies come to the conclusion they are better off settling than spending millions in court to fight a battle they would probably lose.

Another flaw is that the report paints certain PAE practices as somehow evil or improper – taking a “populist” position – which flies in the face of reality. A few selections from the report’s 7 item list of the characteristics of the PAE business model follow.

The report implies there is something “wrong” with companies that do not make things:

They do not “practice” their patents; that is, they do not do research or develop any technology or products related to their patents;

This is a common “charge” heard against PAEs. A charge generally brought by operating companies that would prefer to be able to steal patented inventions from smaller players or individual inventors. There is nothing “morally superior” about an inventor who chooses to manufacturer his or her product, versus an inventor who chooses to sell or license his invention. There is nothing in the patent system that compels a patent owner to manufacture the patented product. Nor should there be. Why should someone who comes up with a really clever feature for a smartphone be forced to manufacture smartphones or lose his ability to protect his intellectual property?

The report implies there is something wrong with being in the business of patent monetization:

They acquire patents solely for the purpose of extracting payments from alleged infringers;

NPEs – entities that “acquire” patents, unlike PAEs which may or may not acquire patents – certainly do acquire patents to extract payments from infringers. This is not a bad thing. It represents a natural evolution in a system where patent litigation has become increasingly expensive and complex. Individual inventors and small companies generally do not have the resources to sue big companies that are infringing their patents. Yet they are still entitled to compensation for their intellectual property. So what can they do? One option is to sell their patents to companies that are specialists in patent monetization, companies that have the human and financial resources as well as the specialized expertise and tools to enforce the patents.

There are many more misguided assertions in the report. Which makes it all the more surprising that the report’s conclusions are not unreasonable.

Report Conclusions

Despite 14 pages slamming all PAEs, the report does not say the answer is to somehow ban firms that are specialized in patent assertion. Instead the report proposes three areas of improvement:

Greater adaptability of the innovation system to challenges posed by new technologies and new business models

Item 1) simply says that the patent office should do its job properly. Patents are already supposed to be clear and meet a high standard of novelty and non-obviousness. There is a simple solution to this: give the patent office the resources it needs to do its job.

Relative to item 2), this is presumably talking about “fee-shifting” – the loser of a patent fight should pay the winner’s legal fees. As long as this is done in an equitable manner – a true “loser pays” system, regardless of whether the loser is an operating company or not, and regardless of whether the loser is the plaintiff or the defendant – it would be a good move. It could reduce not only assertion of weak patents or asserting patents against companies that are not infringing, it could also reduce abuses in patent defense.

The third item, “greater adaptability of the innovation system,” is so vague as to be meaningless. It sounds nice though – who could be opposed to adaptability to challenges?

Overall, the report reads more like it was written by politicians than by economists, scientists, or lawyers. It’s an unfortunate report however – bias and willful ignorance do not help advance the debate on how to best keep America’s patent and innovation system the strongest in the world.

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Discuss this

There are currently 2 Comments comments.

Joff Wild, IAM magazineJune 14, 2013 11:33 am

It was a truly depressing piece of work. It defies belief that something so blatantly one-sided could have been published by the Office of the President. Either the authors did not know what the were doing or they deliberately ignored a great deal of information that is out there. Neither explanation does them any credit. It is deeply troubling that US government policy could be influenced by this report.

JustinJune 16, 2013 1:43 am

This article is very interesting, well thought-out and well written. I completely agree that non practicing entities (or PAEs, as you call them) are not inherently bad, as many assert. I also think that the number one problem with our patent system today is that the USPTO simply does not do a good job in issuing high-quality, truly valid patents. I also agree that the main cause of this failure is that Congress does not allocate enough resources to the USPTO for it to effectively do its job.

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